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China stands pat on rates this time despite Fed hike

Reuters  |  SHANGHAI 

By John Ruwitch and Winni Zhou

(Reuters) - China's central left interest for open market operations unchanged on Thursday, shrugging off an overnight increase in the U.S. Federal Reserve's key policy rate.

The People's of (PBOC) did not explain its rationale for keeping unchanged, after it followed a Fed hike within hours in March.

But the yuan is on steadier footing now, while domestic liquidity conditions are similarly tight.

Markets had been divided over whether the PBOC would raise short-term again in lockstep with the Fed, with those in the "hold" camp noting that China's short-term money and bond yields have already been trending higher.

Traders pointed out that liquidity is traditionally tight in June, and memories are still fresh of a cash crunch in late June 2013 that sent money soaring and spooked global markets.

Earlier on Thursday, the PBOC injected a net 90 billion yuan ($13.25 billion) into the financial system, saying it wanted to counter "liquidity stress" from seasonal tax payments and maturing reverse repurchase agreements.

Banks are also hoarding cash ahead of a rigorous quarterly inspection of their books by the central

The PBOC later said it was keeping the rate for seven-day reverse at 2.45 percent, the 14-day tenor at 2.60 percent and the 28-day tenor at 2.75 percent.

Encouraged by improving economic growth, had already nudged up short-term several times earlier this year as part of a broader push to reduce risks and leverage in the financial system after years of debt-fuelled stimulus.

Those rate moves, while modest, were accompanied by regulatory crackdowns on riskier forms of financing and shadow banking, which have tightened credit conditions and led to China's bond curve inverting in recent months.

There have been no signs the PBOC is contemplating a bolder move in policy such as the Fed's, for fear it could hit economic growth. China's benchmark one-year lending and deposit have remained unchanged since October 2015.

To be sure, a slew of data over the past week showed the has been largely resilient to tightening so far, with solid industrial output, retail sales and exports cushioning the impact of cooling investment.

Still, if sustained, rising funding costs are expected to translate into higher borrowing costs eventually, dragging on business activity. Some companies are already reporting higher financing costs while banks are raising mortgage

Economists at BofA Merrill Lynch said in a note that they believe policymakers are unlikely to reverse their tightening bias as long as growth is likely to be stronger than the official full-year target of around 6.5 percent.


One key game changer for may have been a sharp reversal in market expectations for further depreciation in the yuan and capital outflows, after the PBOC moved aggressively in May to flush out speculative bets against the currency and allowed it to jump sharply against the dollar.

"There've been a lot of pre-emptive moves by the PBOC and regulators to kind of more balance exchange rate expectations in recent months, and so I think really had done a lot of preparation ahead of the FOMC that was widely anticipated anyway," said Nomura economist Rob Subbaraman.

The yuan is now up 2.3 percent so far in 2017, after tumbling 6.5 percent last year.

While a narrower differential with the U.S. should pressure the yuan, it was little changed in spot trade on Thursday at 6.7939 per dollar by midday.

"The market was stable. The (Fed) had already been priced in," said a trader at a foreign in


China's efforts to clamp down on capital outflows - a pressing concern earlier in the year - also appear to be holding up, with foreign exchange reserves rising more than expected in May.

A more sluggish dollar has also helped take pressure off the yuan and outflows this year.

One currency trader believed that also refrained from raising on Thursday because it did not want to establish a pattern of following the Fed.

But Deng Haiqing, chief economist at JZ Securities, said the decision was "debatable".

"It was a good chance to fix the gap between the interest on the OMO and market rates," Deng said.

The one-year Interbank Offered Rate (SHIBOR) has climbed to two-year highs and is currently at 4.42 percent, above the PBOC's official lending rate of 4.35 percent.

The weighted average for the 7-day reverse repo was at 2.7921 percent at 0230 GMT on Thursday - more than 30 basis points above the rate as fixed by the central

Some traders said earlier in the week that a short-term rate rise was still possible in July if liquidity tightness eased.

($1 = 6.7933 Chinese yuan)

(Editing by Kim Coghill)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)